Silicon Valley Nation: California's slow bleed

"California is one of the most hostile places to do business on the face of the earth," says Cypress Semiconductor CEO T.J. Rodgers.

SAN JOSE, Calif.-- Either cry babies or canaries in the coal mine?

You could approach the rising chorus of gloom and doom here about the
future of California, and Silicon Valley, with that question.

Intel CEO Paul Otellini this week, quoted in a Wall
Street Journal story by Deborah Gage, bemoaned the state of State of California,
summoning the dreaded comparison to Greece:

“Oh, God. I was born and raised here. I’m fifth or
sixth generation. It’s one of the nicest pieces of real estate
on the planet, and we’re so close to screwing it up, it’s
pathetic. I’d like to be bullish, but I worry that we have to
hit the abyss before we can fix things, and I worry that the
abyss will be more like Greece.”

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For another perspective, I
chatted byphone with Cypress Semiconductor CEO T.J. Rodgers, as he
munched his lunch in his office here.

Rodgers seldom pulls punches: "California is one of the most
hostile places to do business on the face of the earth," he asserted.

These aren't new sentiments, and you could argue that the captains
of industry are raising hell to lower the cost of doing business and
ultimately boost profits. But you never heard that in the 1960s from
Dave Packard, despite the turbulence of those times. In the 1930s,
there was the Great Depression and enormous labor strife up and down
the West Coast, yet business still came west. Hewlett-Packard
emerged from its garage. The Varian brothers and so many other
startups flourished in that and subsequent decades.

Somewhere, though, we cut ourselves and began a slow bleed we've
ignored. Today, for example, there's no silicon in Silicon Valley,
as Rodgers likes to say. Manufacturing's gone. Packaging and test?
Gone. Rodgers was the last man standing in Silicon Valley when it
came to having his own packaging facility. He finally moved it
overseas when costs got to be too much.

He had a fab too, at the company's North First Street location here. He
sold it. The company that bought, just closed it. Slow bleed.

"People are on the street and the lights are off," Rodgers said.

Today, just 500 of Cypress' 3,500 employees work in the Silicon
Valley. Down the street at Altera Corp., the percentage of San
Jose-based engineers is higher, but the businesses have their differences, their different staffing requirements. Nevertheless, at one
point, both companies had 100 percent of their employees in the
Valley. Slow bleed.

Well that wouldn't be my recipe for a solution. I was just pointing out the differences I observed as an overseas businessman with an operation in California.
It's not the job of a European to tell Californian's how to fix the problem. But at the risk of straying into politics, I can give my thoughts in case they are helpful.
High US salaries (as felt by overseas investors) are a consequence of your exchange rate, which is part due to macro-economic policy and part due to global politics (China buying all those US dollars). The current Federal Reserve policy is driving a weaker dollar, so you are going in the right direction. A weakening Chinese economy is similarly helping.
On health, I observe that in the UK we spend as a proportion of GDP less than half what the US does on healthcare, while automatically covering all the population. That means as an employer healthcare is covered through general taxation, but takes a far smaller amount of money than it does in the US.
In the UK all employees have a contract, usually permanent, but sometimes fixed-term, with defined periods of notice (typically 1 or 3 months). It gives both employer and employee a cushion through uncertain times. The tendency of all competent staff to jump ship at the first hint of uncertainty makes running a business in the US very difficult.

Jeremy,
I am curious about your analysis. It sounds like the recipe for lower costs is
1. Offer low salaries
2. Do not offer benefits such as health insurance
3. Tie employees to fixed-term contracts.
You may not get very many takers in the US, where we expect a living wage, benefits, and freedom of choice.
"Employment at will" works both ways, as many laid-off US Cypress engineers have found. Cypress shrank CA workforce and expanded in India and China. The downside of that has been lower productivity (products take longer to get to market), and (in China), risk of IP "leakage".

He but we can turn our neighbor in for not registering his out of state car.
yay that will fix things...
But he/she doesnt want to dump money registering in california only to be laid off and have to move to the next state promising stable employmen.

How about taking a look at the obvious? Can the state pay its bills? Are individual professionals leaving the state in droves for the lower taxes and business-friendly attitude of Texas?
CA's a pretty patch of country,but it has a well-earned reputation for being hostile to business. And a key part of this is hostility to smaller businesses. Apple and Google can always threaten to take their high-profile jobs elsewhere if they don't get tax breaks, subsidies, etc. But small business is where most people are employed. If they don't grow, unemployment remains stubbornly high. I can sum up the dichotomy of big business love/small-medium business hostility in one word: Detroit - the city I grew up in. CA's got more going for it, but long-term things don't look good.

To an outsider this all seems terribly inward looking from a highly successful economy. Perhaps the biggest risk to California is turning inward and losing its confidence in dealing with the world.
When I ran a business with offices in both the UK and Mountain View, I didn't find the legislation or the taxation onerous. Sure there were differences, but that's the same with any country. Taken as a whole, similar to the UK.
As an overseas employer, I found three BIG downsides.
1) professional salaries are high compared even to the UK, let alone emerging economies.
2) health insurance is a big additional expense.
3) employment "at will" hugely increases uncertainty in the business - will a key member of staff leave today?
I enjoy working in California. I have lots of friends there and wish you all well. It seems if you can fix the three issues above, you will become a more attractive place for overseas investors.

California is somewhat a mirror of the US in general. There are pockets of general prosperity like the bay area along with grinding poverty like the central valley. The legislature is gridlocked and there no easy way out of entitlement spending that is sucking away the vast majority of state and local government budgets. Historically Californnia has been a leader of trends in the US. Maybe they can find a way to lead the way out of this morass for the rest of the country.

It's interesting reading this article right after reading "Samsung seeks to reinvent itself in Silicon Valley" here on EETimes. And, not all fabs have left the country. We still have a pretty big silicon fab footprint up here in Oregon.
I don't know that there has ever been a time when business people haven't complained about taxes, regulations and healthcare costs so I really don't know how much of that is the real issue or is just a reminder that it's been more than a business person would like for my entire life.

I don't even know that "manufacturing jobs" per se must be brought back, although that probably can't hurt. What has to be brought back are HIGH VALUE jobs, jobs that bring in the best and the brightest, as they once did. Manufacturing jobs may not necessarily be that, in the future. Or at least, not just manufacturing jobs.
As if it's not bad enough that high value jobs have been moving out, California is also demanding more and more social services. So for example, pregnant women can go on disability, these days. Isn't that nuts? Just one example of the sort of largesse California cannot afford, and is making matters worse by scaring off corporations and wealthy people with punitive taxation.

Bring back manufacturing and you cement the future of design engineering in the valley. (We're starting to wake up to what we've lost on the design front by off-shoring manufacturing):
http://hbr.org/2009/07/restoring-american-competitiveness/ar/1
Otherwise, things bleed away.
There's always a balance and a tension between a growth a region enjoys because of a business explosion and the needs of the populace as served by its government. More regulation is not always a bad thing.
But, take your eye off the fact that nurturing manufacturing and entrepreneurship is the key to longterm regional growth, and you end up like Detroit.